From Chaos To Cash

Hyflux ~ Olivia power, supp 2.74/2.67 , volume declines on retracement. (vested)





Hongguo ~ Time for another round? supp 1.07/.965






MAE Engg ~ superbull, supp .19 , res .25






CapitaLand ~ Reversal! Firm supp 6.50 , res 7.25






Wildbey ~ Retracement completes, supp 2.28 , res 3.00 (As requested)





Sin-Oh ~ Rising Up! firm supp 2.68 , res 3.08 (as requested)





My purposes in this chapter are: to introduce you to the basic concepts of Chaos in a relatively non scientific manner, and to point out its applicability to profitable trading and investing. When I first started trading, over 40 years ago, the primary approach to understanding the markets was fundamental analysis. Poring over the company s financial statements, examining the crop reports, and gathering as much "expert" opinion as could be found were the standard procedures. They did not produce predictable or profitable results, but they were the only options if one did not have insider information. Through these past four decades, I have seen the personalities of both the stock market and the commodity markets change many times. Actually, they are in a constant state of flux They form an example of "applied chaos." In the 1970s, very few traders would admit that they used technical analysis. In those days, technical analysts were considered "weirdos." There has now been a complete turnaround.Today, most traders are proud to call themselves technical analysts not because they have been successful, but because they are following the crowd.

The newest science on this planet is the Science of Chaos. In this chapter, we will explore the generalized principles derived from this science and apply them to life and particularly to trading on the stock and commodity markets. As pointed out earlier, the Science of Chaos deals primarily with natural phenomena. One of Mandelbrot's pregnant findings was that the fractal dimensions of rivers are similar to those of commodity and stock markets, which is an indication that the markets are more a function of nature than a process designed by the left hemisphere of the human brain. Our view is that economics fundamentals and technical/mechanical analysis do not draw an accurate map of the market's behavior. The Science of Chaos provides three primary principles for the study of markets. Collectively, these principles govern the behavior of energy. As discussed fully in Robert Fritz's book, The Path of Least Resistance, these principles are:

1. Everything in the universe follows the path of least resistance. The markets are like a river.As they move through each trading minute, they take the path of least resistance. That's whatwe all do; you, me, the markets, everything in nature. It is part of the inherent design of nature. While a river is running downstream, the path of least resistance determines its behavior. Gravity is energizing it as it flows around rocks and along curves in the riverbed. You are reading this sentence at this time because this was the path of least resistance when all your time management factors were examined. You are sitting wherever you are because that location was on your path of least resistance. In the market, you will exit from a losing trade when the pain of losing one more dollar becomes stronger than the pain of saying that you were wrong to be in the trade. The path of least resistance will win again.

2. The path of least resistance is determined by an always underlying and usually unseen structure. The behavior of a river, whether it is calmly flowing downhill or creating rapids, depends on the underlying structure of the riverbed. If the riverbed is deep and wide, the river will flow calmly downhill. If the riverbed is shallow and narrow, the riverbed will create rapids. The behavior of the river can be accurately predicted by examining the underlying riverbed. If you could see the bottom, you could accurately predict the behavior of the river at that point. Many traders who keep repeating their trading behavior produce losses. They often feel powerless and frustrated. They attend seminars, read books and underline appropriate passages, study NLP (Neuro Linguistic Programming), have private sessions with market psychologists, and then find themselves back in the same old losing rut. If that has happened to you, you simply haven't changed your underlying structure. Permanent changes happen only when you alter the riverbed, the underlying structure. As a trader, you always know when you are trying to go against the path of least resistance. Tension immediately builds up in your body and mind. If you are tense about trading, you are not "floating down the river." Once you learn to determine the underlying structure of a market, you can make peace with the behavior of the market and simply "float like abutterfly, sting like a bee."

3. The always underlying and usually unseen structure can be discovered, and it can be altered. You can change the flow of your life and your trading. To do this easily and permanently, you must work with the underlying structure rather than the behavior produced by that underlying structure. The basic concept derived from these three principles is this: you can learn to first recognize the underlying structure that is driving your trading, and then change it so that you can create what you really want from the markets. Structure determines behavior. Structure determines the way anything behaves; bullet, a hurricane, a cab driver, a spouse, a market. The way the pits are structured determines the behavior of the traders in the pits. The structures that have the most influence on your trading results are composed of desires, beliefs, assumptions, and, most of all, your understanding of the underlying structure of the market and yourself. As Robert Fritz notes, "You can't fool Mother Structure ."

(Excerpts from New Trading Dimension: How To Profit from Chaos)